Section 194N – TDS on cash withdrawals over and above Rs. 1 crore has been introduced through the Finance Bill, 2019 in the Union Budget 2019 proposed on 5 July 2019.
The purpose behind the insertion of this section is to discourage cash transactions in the country, move towards less cash economy and promote the digital economy.
Applicability of Section 194N (TDS on cash withdrawal)
Section 194N is applicable to any person (Recipient) who withdrawals cash of more than Rs. 1 crore during a financial year. This section will apply to all the sum of money or an aggregate of sums withdrawn from a particular payer in a financial year.
Extract of Section 194N as per Income Tax Act states that the following:
“If the aggregate sum of cash withdrawals from a bank account by the respective account holder crosses the threshold limit of INR 1 Crore for a previous year, then TDS at a rate of 2% will be applicable on the excess amount is withdrawn after the INR 1 Crore limit. This shall take effect from the 1st of September, 2019”.
Who will deduct TDS under Section 194N?
The person (payer) making the cash payment will have to deduct TDS under Section 194N:
- Any Bank (private or public sector)
- Co-operative Bank
- Post office
The section will apply to withdrawals made by any taxpayer including:
- An Individual
- A Hindu Undivided Family (HUF)
- A Company
- A partnership firm or an LLP
- A local authority
- An Association of Person (AOPs) or Body of Individuals (BOIs)
Non-Applicability of Section 194N (TDS on cash withdrawal)
Section 194N of the Income Tax Act will not be applicable to any Recipient if they are either of the following:
- The Government of India
- Any Banking Company/Co-operative Society that is engaged in the business of banking
- Post Office
- A business correspondent of a Banking Company/Co-operative Society
- Any white label ATM operator of any bank (including co-operative banks)
- Any person or a class of persons, through a notification in the Official Gazette, specified by the Central Government of India in consultation with the Reserve Bank of India.
What is the rate of TDS under Section 194N?
The payer will have to deduct TDS at the rate of 2% on the cash payments/withdrawals of more than Rs. 1 crore in a financial year under Section 194N.
When to TDS under Section 194N?
TDS will be deducted by the payer while making the cash payment over and above Rs. 1 crore in a financial year to the payee.
If the payee withdraws a sum of money on regular intervals and once the total sum withdrawn exceeds Rs. 1 crore in a financial year, the payer will have to deduct TDS from the amount.
Example for Section-194N (TDS on cash withdrawal)
If a person withdraws Rs. 99 lakh in the aggregate in the financial year and in the next withdrawal, an amount of Rs. 1,50,000 is withdrawn. Here the aggregate amount exceeds Rs. 1 crore and the liability to deduct TDS arise. However, the TDS liability is only on the excess amount of Rs. 50,000.
Hence, it is important to Note that The TDS will be done on the amount exceeding Rs. 1 crore.
Few points to be considered
- The limit of Rs. 1 Crore is applicable for each and every account maintained by the bank or similar entities. For example, a person having three bank accounts with three different banks, he can withdraw cash of Rs. 1 crore * 3 = Rs. 3 crores without any TDS.
- Banks and similar entities as mentioned above generally make payments in cash instead of cheques. The respective account holders issue cheques. Therefore, the bearer cheque of a bank does not fall under the definition of cash in the context of this Section. So TDS is not applied in this situation.
- In the case of a payment made by a taxpayer through a bearer cheque issued to third party, in excess of Rs. 1 crore in a financial year, the recipient of the cash is not the account holder, but a third party. In such a case, the payment is not made by the bank to the account holder
- The limit of Rs. 1 crore will be applicable to the cash payments/withdrawals made during the FY 2019-20. The provisions of Section 194N will be applied to the payments made on or after 1 September 2019.
- The Section mentions the cases of the exempted category of payments. These include payments made to the Government, Banks, Co-operative Societies and Post Offices. This means that any person making payments to such entities are exempted from deduction of TDS irrespective of the amount withdrawn as cash.
- It is mandatory for banks to deduct TDS, this being a service provided to the government under law by the bank, the banks should not be charging any service charge.